The One Thing

The One Thing

Last week, I shared Ninety One’s views and “value dream” about local domestic equity valuations, which appear “to be entirely discounting the current reality and presenting good value.”

Local Market Conditions Improving

Foreigners are now seemingly appreciating this more, and for this reason, we have seen sizeable new inflows into our country in the last month, giving rise to a stronger currency, notwithstanding that we have an election in two weeks.  

This week, I attended our annual PWM national conference. I had various sessions with SA’s top management teams in the space of Income Funds, including Ninety One, Coronation, Mail & Guardian (previously called Prudential), Prescient and Marriott, where overall the sentiment is decisive for the Rand, offshore (tempered) and local (both bond and share) markets, even if interest rates do take a few months longer before we see the first actual interest rate cuts in the US which the rest of the world usually follows.

This was further supported on Wednesday, when US Inflation met consensus expectations in coming down to 3,4%, and core CPI inflation (which by definition excludes highly volatile food and energy prices), which is almost more essential for us market-wise, declined to 0,3% from 0,4% in March.

Local Income Funds Look Well Poised in the Space of Cash and Cash Equivalents

Meeting with the various income fund teams, all were unanimous that even if US interest rates only decline later this year (and so SA), the bonds underlying the income funds will already price these in before that time.

They commented that they expect these funds to deliver more than 10% this calendar year (how much more than 10% depends on SA inflation data later this year) and just on double digits next year (2025 calendar year) when inflation declines further and interest rates are cut.  

This follows last calendar year’s 9,4% - 9,6% per annum results between the leading Income Funds, which were well ahead of the money market and notice deposits - so this year and next, we are now expecting even more in this space.       

Coronation on Offshore Exposure within Local Markets is Undervalued

One of my many further sessions was with Sarah-Jane Alexander, Co-Manager of the Coronation Balanced Plus and Equity Funds.

She expressed her views that SA was looking more promising on several fronts (load-shedding, Transnet, tax collections), but overall, with a longer-term forward view, they still have concerns about SA growth—that we share.

Sharing her full slide pack, which is attached, she painted the backdrop of the importance of asset allocation, being the main driver of investment returns, and their strong longer-term track record in achieving results well ahead of markets over time.

After that, on slide 16, she made the point that their positive view of their increased holdings in the SA equity (share) market is not a bet on SA Inc as such - but rather where the shares they hold have over 60% exposure to offshore earnings;     

The graph above shows that the upside from the current share prices in their portfolio, to fair value – is over 50% at present, and well above the long-term average.    

However, their view of SA equity (shares) being undervalued is not necessarily a view on only SA, but more that the offshore income earned from our locally listed JSE market and that sees over 60% of the earnings of the shares held in their portfolio, being foreign income - is being unfairly discounted and not properly valued.    

Private Client Securities Chief Investment Officer Andrew Dittberner with Bruce Whitfield | Closing Thoughts

PCS Chief Investment Officer Andrew Dittberner recently sat down with financial journalist Bruce Whitfield to share his views on markets, investment themes and where they are currently seeing opportunities.

In their final video (the first video I shared last week), Bruce brings their investment team together and challenges them with some interesting questions. He asks about their most considerable disagreement in the past year, stressing the importance of healthy debate within an investment team. He also prompts a discussion on their views on Bitcoin and cryptocurrencies.

To view, simply click image to watch the video (duration: 10:23);

Friday Food For Thought